Introduction to Economics

Why Economics is Important

• Essential for making managerial decisions.
• Aids in designing and understanding public policy.
• Provides insight into how economies function.
• Equips students with economic understanding for real-world application and decision-making.
• Gives business owners insights on how market forces impact business.

Introduction to Economics

• Deals with the allocation of resources and choices made by economic agents.
• Concerned with utilizing naturally scarce resources.
• Focuses on production, distribution, and consumption of goods/services.
• Examines choices by individuals, businesses, governments to allocate limited resources.

Types of Economics

• Microeconomics
• Macroeconomics

Reasons to Study Economics

• Study of society
• Trains minds to think systematically about business and wealth
• Provides tools to predict economic trends accurately
• Enables informed choice of economic alternatives.

Economics Defined as a Science

• Involves decision-making with scarce resources.
• Resources are used to produce a good or service to achieve a goal.
• Economic decisions allocate scarce resources to meet managerial goals.
• The nature of these decisions varies with the manager’s goals.

Definitions of Managerial Economics

• Milton H. Spencer and Louis Siegelman: Integrates economic theory with business for decision-making and planning.
• Evan J. Douglas: Applies economic principles and methodologies to decision-making within firms under uncertainty.

Nature of Managerial Economics

• Focuses on optimal solutions to business decision-making, microeconomic focused
• It is a practical and pragmatic subject.
• Involves analyzing firms within the broader economy, macroeconomic focused
• Aims to provide optimal solutions to business problems.

Scope of Managerial Economics

• Demand analysis and forecasting
• Cost and production analysis
• Pricing decisions, policies, and practice
• Profit management
• Capital management
• Being a developing science, the scope is dynamic

Benefits of Business Economics

• Provides tools and techniques
• Provides concepts
• Answers basic problems such as product mix, cost production techniques, output level, investment decisions, and selling costs.
• Supplies data.
• Helps in forecasting.

Functions of Managerial Economics

• Focuses on Decision making from available alternatives.
• Identification of firm's objectives such as profit, sales, service etc.
• Statement of the problem regarding product, price, promotion, production, etc.
• Identification of alternatives.
• Implementation and monitoring of the chosen alternative.
• Location, operating, and financial decisions.
• Inventory management
• Cost and Output decision making.

Fundamental Concepts

• Incremental concept
• Time perspective
• Discounting principle
• Opportunity cost
• Profit maximization
• Demand and supply analysis
• Risk and uncertainty analysis.

The Incremental Concept

• Focuses on small additional changes rather than large shifts.
• Benefits and costs should be evaluated before decisions.

Time Perspective

• Economics distinguishes between the short run and the long run.
• Distinction is determined by the speed decisions can be made and production factors can be varied.
• The short run allows only some factors to vary.
• In the long run, all factors are variable.

Discounting Principle

• A rupee today is worth more than a rupee in the future due to the time value of money and future uncertainties.

Opportunity Cost Concept

• Measures the value of the most valuable alternative that has been foregone.
• The value of the next best alternative.

Types of Goods

• Goods are produced to satisfy customer needs and wants.
• Free goods are not scarce.
  • Have zero opportunity cost, unlimited in supply
• Economic goods are produced using scarce resources.
  • Limited in supply, involve opportunity costs.
• Consumer Goods
• Fast-Moving Consumer Goods
• Durable Goods
• Capital Goods
• Intermediate Goods
• Normal Goods are goods and services for which demand increases with the increase in disposable income
• Luxury Goods
• Inferior Goods are cheaper than normal goods purchased when consumers face falls in disposable incomes
• Veblen goods are bought to show off purpose
• Complementary goods
• Substitute goods are alternatives to another like for like good
• Giffen goods have a demand that increases when price goes up

Utility

• Is a concept used to determine the worth or value of a good or service.
• Represents the total satisfaction or benefit from consuming a good or service.
• Economic utility affects the demand and price of goods or services.

Production in Three Manners

• Form utility is created by changing the physical shape or size of existing goods, for example converting wood into furniture.
• place utility is created by transporting goods from the place of plenty to the place of economic need for example gold, petrol etc.
• Time utility is created by storing goods until they are required for example food storage.

Wealth

• The total value of all assets owned by an individual, household, business, or nation.
• It should have utility and satisfy human wants.
• It should be scarce and transferable.
• Wealth types include personal, national, financial, and productive wealth.

Value

• Refers to the worth of a good or service, measured by utility, exchange, and cost.
• Value in use is the satisfaction derived from using a good or service.
• Value in exchange is what consumers are willing to pay
• The Value equation is benefits/costs

Factors of Production

• Economic term used to describe inputs to create economic profit in goods or services production.
• Resources needed for the production.
• Include land, labor, capital, and entrepreneurship.
• Initially, economists regarded labor only, later including land and capital.
• Entrepreneurship is a more recent consideration from capital.

Land

• Includes natural resources like oil, gold, wood, water, and vegetation.
• Divided into renewable such as water, trees etc. and non-renewable resources such as gas and coal etc.
• All resources be them renewable and non renewable are used as inputs, income from land is called rent.
• Can be used for multiple processes and land is limited.

Labor

• Refers to the individuals effort in the production of goods and services that depends on human capital from skills and training.
• Output can be measured by the amount output someone can produce. The income from this is wages.
• Is heterogeneous in regards to each unique persons skill set
• Is perishable
• Is associated with human efforts and work environment

Capital

• Refers to money to purchase items to produce goods and services and has an income referred to as interest.
• Created by humans
• Lasts a long time, but depreciates
• Is mobile

Entrepreneurship

• Combines land, labor, and capital to produce goods or services.
• Requires combining a great idea with innovation
• Involves taking business risks and identifying opportunities.

Economies of Scale

• Cost advantages due to increased output levels.
• Financial benefits from enhanced production capacity.
• Average cost per-unit decreases as production volume increases.
• Efficient production, reductions in logistics costs and promotion costs.
• Achieved by spreading risk and buying in bulk with cheaper capital.
• Scale refers to the size or level of activity.
• Organization size is a factor, larger size leads to achieving benefits such as spreading rent and utilities.

Firm

• A business unit involved in producing profit through goods and services for consumers, businesses, and governments
• Generate financial return from work and acceptance of risk
• Types; These include
• Sole proprietorship
• Partnership
• Corporation: owned by multiple shareholders that is overseen by a board of directors that hires managerial staff
• Cooperative: fundamental to economic democracy and investors say in the companies operations.

Objectives of Firms

• Non-profit or co-operative in nature
• Focus on business objectives regarding social and environmental concerns
• Be sales maximisation focused
• Profit satisficing as well as profit maximisation focused

Decision Analysis (DA)

• Is decision-making by identifying and assessing all aspects to making decisions?
• Aims to ensure decisions are made with relevant information and options.

Types of Decisions

• Price and output
• Demand estimation
• Choice of technique of production
• Advertising
• Long-run production
• Investment
• Important to incorporate decision analysis to ensure success

Decision Analysis Works

• Decision analysis evaluates corporations on all the outcomes to provide decision making
• It involves the best approach
• Analysis entails measurement of goal outcomes
• Important to measure a framing problem for analysis and evaluate the problem from every angle.
• Influence diagrams and decision trees can be used to evaluate outcomes

Economic Decisions

• The quantitive measurements measure the variance between variants
• Comparisons are done between alternatives and quantify the differences between alternatives.
• A clear view of a project's long-term financial sustainability is required and will also determine returns on investments,
• Capital expenditures and operational costs are also important.

Technical Decisions

• Aims to ensure all facilities are available for successful implementation
• It ensures the best facilities are chosen from alternatives for success.

1. Selection of enterprise.
2. Plant machinery available and suitable for needs.
3. If any engineering challenges are available.
4. Establishing the schedule of project implementation.